Charitable contributions, washing sales and new tax rules on the horizon

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Changes in tax law on the horizon may impact cryptocurrency, but it might be a good time to … [+] consider crypto for charitable giving.

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Cryptocurrencies are certainly in the spotlight. As of September 24, 2021, Bitcoin (BTC), the largest crypto currency, had a market capitalization of around $ 776 billion. The total market capitalization of all cryptos traded is around $ 2.1 trillion. As cryptocurrencies become mainstream, planning issues abound in the tax realm, especially with harvesting losses and donating the gains to charity. Thoroughly explore these two subjects in the light of the new legislation that is on the horizon.

Crypto Tax 101. For federal income tax purposes, cryptocurrency is property. This means that the sale is treated like the sale of other goods, in particular the capital gains or losses are assessed when the crypto is exchanged for real currency. If the asset is held for one year or less, the resulting transaction is considered a short-term gain or loss. If it is held for more than a year, it generates a long-term gain or loss. Gains and losses are offset against each other, short-term gain against short-term losses and long-term gains against long-term losses, then the net short term is offset by the long term. A resulting net loss is deductible at $ 3,000 per year, with the balance carried forward. Short-term net gains are treated as ordinary income, and long-term net gains receive special treatment from capital gains. A summary of the IRS gains and losses can be found here.

The basis in crypto is the purchase price minus any purchase costs (wallet fees and transaction fees). The adjusted selling price is the gross proceeds minus the selling costs.

Washing sales. Because Crypto is a property, it is not subject to the rules of blanketing. The wash sale rule prevents certain transactions from reaping losses and replacing ownership early. For example, if you hold XYZ shares with a base of $ 50 a share and it drops to $ 30 a share and sell it, you realize a loss of $ 20 a share. However, if you buy XYZ shares within 30 days of the sale (before or after), the loss is rejected. This rule does not apply to Crypto. If you own $ 40,000 BTC and it drops to $ 30,000, you lose $ 10.00. You can redeem BTC immediately while realizing the loss. You may have bought a coin on April 5, 2021 for $ 60,203 and sold it on June 1, 2021 for $ 31,796. You would have a short-term loss of $ 28,407, which you could use to offset other gains. Suppose you redeemed your BTC at the same time (note that you would lose the transaction fees), your base would be reset to the new purchase price. The fact that the wash sell rule does not apply helps crypto owners create a very effective tax collection strategy. But beware, some members of Congress don’t like this, and there’s a new rule lurking (read more) that could change that scenario.

Charitable donations. One area where interest has risen sharply is in charitable donations with cryptocurrency. According to Mike McLean, director of investment operations at Fidelity Charitable, Fidelitys’ cryptocurrency donations increased by about 300% from January to September 2021. Alex Wilson, co-founder of Giving Block, said their involvement nonprofit has grown from 100 nonprofits in early 2021 to 500 in September. We expect 1,000 nonprofits to be on our platform by the end of the year, Wilson said. Wilson also observed that the demographics of crypto donors are very different, many crypto holders have 90% of their wealth tied to currencies and have never made a check-type donation. We saw a whole new horizon of donors. Wilson tells the story of the Pineapple Fund, where an anonymous donor gave $ 56 million worth of Bitcoin to 50 nonprofits in 2017. He explained that the donation, in turn, led to the creation of Giving Block. to facilitate crypto charitable contributions.

Mechanics of cryptographic donations. Fidelity and Giving Block handle donations differently. Giving Block sets up a wallet for the association and accepts donations 24/7. It liquidates the currency (minus its fees) and credits the portfolio of nonprofits. Fidelity uses its digital wallet and transfers the funds to a Donor Advised Fund (DAF). Fidelity sells the donation currency during the hours of operation of the New York Stock Exchange. Costs vary between options. Because cryptocurrency is considered property, crypto charitable donations over $ 5,000 must be appraised. Josh Lefcowitz, CPA, and valuation services partner at Cohen & Company, observed that people may have experience donating valued publicly traded stocks, which is a special exception to the requirement. devaluation. The tax code specifically states that only the shares of a company are eligible for the exception. There are complexities around the valuation of cryptocurrency due to multiple markets requiring the use of a price aggregation tool. Additionally, appraisal is still required for gifts over $ 5,000 and costs time and money. Wilson of Giving Block and McLean of Fidelity strongly recommend that appraisals accompany IRS Form 8283.

To be eligible for a fair market value deduction, the property must be held for more than one year. Identifying a specific lot becomes very important in the digital wallet for which the currency is given. Applications such as ZenLedger and CoinTracker allow specific lot identification. If a wallet had an April 24, 2020 coin at $ 7,543 and another April 9, 2021 coin at $ 59,778, the holder could donate the April 2020 coin and get a fair market value deduction (say $ 41,134), which he could deduct, and avoid capital gains taxes on $ 33,591 of capital gains. They could also sell the April 2021 coin and receive a short-term capital loss of $ 18,644, which they could offset against other gains and use at a rate of $ 3,000 per year. There is a profound difference between the results depending on the given coin and the one sold. If the holder did the reverse (donated the 2021 coin and sold the 2020 coin), they would pay capital gains taxes on the 2020 coin and have no loss carry-forwards, in no more losing the loss on the depreciated coin from 2021.

Storm Cloud: The House Ways and Means Committees proposal of 9/13/2021 on taxes aims to remove the crypto wash sale exclusion. As the proposal progresses through the legislative process, changes and developments go hand in hand. If the proposal becomes law, the effective date would be 12/31/2021, so the time to use the washing exemption may be limited.

Bottom Line: As crypto becomes more mainstream, holders should be vigilant about changing crypto tax rules and charitable opportunities. With potential new legislation on the horizon, familiarize yourself with the rules or find an expert who can help you. As always, I will try to answer questions [email protected].

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